Extreme pressure on practice finances calls for accurate forecasting. Specialist medical accountant Kieran Hancock explains why setting a budget will help practices navigate potentially choppy waters.
Practice managers are used to dealing with fluctuating income and expenses. Contract income changes year on year and mandated increases to the National Minimum Wage and employer National Insurance contributions must be absorbed into already stretched budgets.
Yet many practice managers do not complete a practice budget.
Here are a few steps to take on how to achieve accurate forecasting and tips on how this can help practices plan for financially challenging times ahead.
1. Set a baseline
Before the start of a new financial year, build a budget from the ground up to quantify an initial profit figure.
In 2026/27, the global sum received a 5.4% uplift. However, the recommended pay rise of 3.5% and a National Minimum Wage increase of 4.1% will reduce the benefit of that uplift and, in some practices, may absorb it entirely. There are other changes too, including capacity and access funding moving into the new GP reimbursement scheme.
Without setting out the details on paper, it is difficult to assess the impact of these changes on your practice.
Start by reviewing all income streams to quantify activity and note the month in which income and expenses are expected to fall. Do this line by line, ensuring all possible income streams are covered for the full year. If a certain income stream lacks clarity, consider past performance and any known changes to give you a starting point.
Establishing this baseline profit gives you a clear position from which to plan. If the resulting profit is acceptable to the partners, they should ensure they are doing what they can to deliver. If the resulting profit is lower than anticipated, don’t panic. The budget is forward-looking and decisions can be made to change course, including consideration of how to reduce expenditure or generate additional income streams.
2. Review and reflect
Once the new accounting year has started, the budget will quickly go out of date. Income and expenses will vary throughout the year, so it’s essential to regularly review the practice’s finances against the agreed budget.
Work with your accountant to get the most out of cloud accounting software and create useful, understandable reports to review performance. If you do not use cloud software, making the change now could bring efficiencies, improve clarity and help the practice prepare for the future.
Many practices review financial information informally, by reviewing cash in the bank or basing decisions on a sense of how the practice is performing, rather than on actual performance. Using bespoke reports to establish monthly or quarterly performance means informed decisions can be made.
3. Look at service profitability
Many practices let income drive action. Income from a particular enhanced service that generates tens of thousands of pounds may look appealing, but what does it cost to deliver? Profit is key, not the level of income generated.
One of the key benefits of drawing up a budget and engaging with the process is that it pushes the practice to operate as a business, with a view to generating more profit. That commercial mindset and the visibility of financial information will help you review the profitability of key services.
While the budget covers overall income, expenditure and profit, additional calculations can be completed to establish the true cost of a service, including:
- Planning and admin costs
- Staff costs
- Fixed or overhead costs.
Review the results of your calculations to find out if profit could be improved. For example, it may be possible to deliver multiple services at the same time and/or deliver the service in funded time, such as enhanced access time.
If the numbers show the service is not generating the required profit, the partners can decide whether to continue offering it.
When it comes to neighbourhood working, following the same principles used to set a budget and establish baseline profitability will help you and the partners understand the financial impact of signing up to – or tendering for – new contracts.
4. Plan financially for partners
The stress for partners in dealing with unwelcome surprises in the shape of increased tax and pension liabilities can be reduced by having a budget.
Where profits rise from one year to the next, the self-assessment tax system means partners are subject to spikes in tax liabilities in the January following the practice year-end. These liabilities are not always known until relatively close to the tax payment deadline of 31 January.
This is where having a budget in place can help, since the practice accountant can turn these figures into anticipated tax and pension liabilities. If profits are expected to rise, partners can be given advance warning and save accordingly.
This also allows partners to review tax planning opportunities with the practice accountant or their financial advisor. These may include incurring expenditure at the right time, investing in certain tax-efficient investments, or making additional pension contributions.
With an indication of likely profits, partner drawings can also be calculated.
Many practices pay the same level of drawings for several years and partners do not always receive monthly increases. Increased profits can mean increased drawings. Conversely, reduced profits may mean drawings need to be adjusted downward so that partners do not overdraw and later have to repay funds to the practice.
5. Use your budget to help with succession planning
Partners come and go, and these changes have financial implications. Incoming partners will be keen to understand their anticipated profit shares and drawings. With a budget to hand, calculations can be provided to the incoming or prospective partner.
Profits are a key driver of partner recruitment, so presenting the practice’s financial position clearly can increase the likelihood of securing a new partner, particularly when candidates are considering more than one opportunity.
Equally, there are financial implications when a partner leaves. If the partner is not being replaced, practices can use the budget to understand what they can get for the replacement cost and consider the appropriate staff mix.
To conclude, practices are businesses and need to make a profit. Profit supports practice sustainability and can help improve patient care. Ensuring that a practice’s systems can cope with the ever-increasing financial demand will help keep it viable for the long term.
Kieran Hancock is a board member of the Association of Independent Specialist Medical Accountants and healthcare director at Forvis Mazars.
